Advantages and Disadvantages of a Non-Disclosure Agreement

by N. Paul Friederichs III

Non-Disclosure Agreements (NDAs) are versatile and necessary tools in the arsenal of anyone, inventor or corporation, who handles intellectual property. An NDA is a contract whereby the signer agrees not to disclose certain information, except under terms as described in the contract. A non-compete agreement (NCA), inhibiting use of the information in competition with the disclosing party, is often included as a clause within the NDA.

A NDA can be obtained at little to no cost, although one needs to be cautious in making sure the agreement will fit the use intended. NDAs should be used as part of a larger strategy and may be used in conjunction with patents and patent applications. This paper identifies the principal arguments in favor of and counter to NDAs.

1. Cost

NDAs are perhaps the lowest cost of protection for an invention. Often a simple agreement can be obtained for little to no cost. Although cost is one of the primary benefits of NDAs, this advantage has a tendency to breed over reliance.

2. Breadth

NDAs provide broader protection than patents, which is a reason justifying simultaneous use of NDAs and patent applications. Breadth includes both positive and negative aspects. Broad protection is beneficial at nearly any time. Most NDAs, however, struggle in determining exactly what is and is not covered under the terms of the contract. A common example is where there is no recording of what information was communicated during the discussion. The ambiguity can lead to problems should the matter ever come to litigation. The disclosing party wants the contract interpreted broadly including all information related to the actual disclosure, whereas the disclosee may wish to interpret the coverage much more narrowly. This can be a costly issue to resolve.

3. Integrity of the disclosee

There is an old adage that a contract is only as good as the person signing it. One is safer using an NDA with those people of known high integrity and is of little value with person having low integrity. This integrity problem is compounded with the inventor’s inability to monitor the disclosee. Often people will not have an NDA signed by persons having high integrity, but this leads to the next problem.

4. Integrity of the Process

Inventors often get in a hurry and forget to use the NDA. For example, flaws can easily occur when one has the invention witnessed, when speaking to a friend, or when forming a relationship with a marketer or manufacturer. Perhaps this forgetfulness occurs due to the inventor perceiving everyone to be on the same side or perceiving people will respect the interests of the disclosing party. Even if they are and do, the disclosure in the absence of an NDA can constitute a public disclosure and void any future protection. Public disclosure is a legal point that has nothing to do with the integrity of the people hearing about the invention.

5. Integrity of the Document

Each state has laws regulating the validity of NDAs and other such contracts. Some states show little concern for NDAs and regularly find them invalid. Should the contract be flawed, it may provide no protection at all. In some states one invalid clause will invalidate the entire contract. One can guard against this problem by seeking legal counsel on the validity of the contract before reliance is placed on it.

6. Delays necessary filing date of a patent

In the US, a patent must be filed within one year of the first public disclosure or offer for sale. Nearly all other countries require the patent application to be filed before the first public disclosure or offer for sale. A disclosure under the terms of a valid NDA does not constitute a public disclosure, assuming no inadvertent mistakes. The one year clock (US) or the requirement of prior filing does not take hold absent an offer for sale or a mistake in the handling of the NDA.

One, evaluating the benefits and risks of NDAs, should keep squarely in their mind whether ultimate protection may include a patent. NDAs are highly risky for protecting an invention. Problems with a flaw in the signing process, unexpected impact of law, an inadvertent mistake on the part of the discloser or disclosee and lack of clarity in breadth will generally destroy all possible foreign patent rights and start the US one year clock ticking. Discovering the error may not occur quickly, which can lead to permanent loss of US patent rights before the inventor learns s/he needs to act. A more secure form of protection is advised when the information being protected could be protected with a patent.

These tough patent laws should be contrasted with trade secret laws that generally require reasonable care. An inadvertent error under trade secret law is much less likely to be fatal. Unlike patent law, trade secret law generally does not require flawless execution. Trade secret law typically requires reasonable care under the circumstances, which tends to make allowance for inadvertent and non-consequential errors.

Low cost and broad protection make the NDA a valuable tool in appropriate circumstances. An NDA should always be used to protect trade secrets, but has limited value as the risks increase for protecting patentable subject matter. Patentable subject matter is better protected under the more secure patent laws with either a provisional or formal patent application. One should use NDAs where appropriate and in view of these risks and benefits.

About the Author:

N. Paul Friederichs, founder, started practice as a patent attorney in 1992 at a major Minneapolis, Minnesota law firm where he was the highest performing associate. In 1993, he started and developed Friederichs Law Firm with his father. Throughout this time Paul’s experience was heavily weighted toward litigation. He served such clients as Tonka Toys, American Harvest and Boston Medical.